Why are European households holding onto their wallets while American consumers are becoming more active?
Recently, the latest data released by the European Statistical Office showed that in the second quarter of 2024, the euro area household savings rate rose to 15.7%, a three-year high, far higher than the pre-epidemic average level of 12.3%.
While overall savings rates are not directly comparable, the trend in the United States is clearly different: U.S. consumption has fueled the economic rebound. Data showed that the U.S. personal savings rate was 5.2% in the second quarter, lower than the average level of 6.1% during the period 2010-2019.
Andrew Kenningham, chief European economist at Capital Economics, believes that the increase in household savings in the euro area is due to rising interest rates and low consumer confidence, but the continued upward trend in recent quarters is puzzling.
Kenningham said in a report that since the pandemic, (European) savings may have shifted to a permanently higher level, reflecting structural changes in the economy, and "we do not expect the savings rate to fall significantly soon."
Why EU consumers are holding onto their wallets
Data shows that European households’ savings rates are above pre-pandemic levels, a stark and persistent difference from more active U.S. consumers.
Previously, during the epidemic, as consumers stayed at home, savings rates on both sides of the Atlantic rose sharply. But after the epidemic, when Americans began to release their consumption potential, Europeans seemed to be unable to shake off their economic insecurity.
Data from the European Statistical Office showed that the euro area household savings rate continued to grow in the second quarter of 2024, reaching 15.7%, compared with 15.2% in the first quarter, as total disposable income increased by 0.8%, faster than consumption (0.2%).
Meanwhile, the euro area household investment rate fell from 9.3% to 9.2% in the second quarter of 2024, due to a 0.6% drop in gross fixed capital formation.
In the second quarter of 2024, the profit share of euro area companies (non-financial companies) fell from 39.1% to 38.8%, as companies' compensation of employees (wages and social contributions) plus taxes less production subsidies increased by 1.2%, faster than gross value added (0.7%).
Mark Zandi, chief economist at Moody's Analytics, believes that active U.S. stock markets and high housing prices have helped U.S. household wealth grow, while in Europe, where stock ownership is less broad-based, rising stock prices have provided less impetus.
He added that European homeowners have more short-term mortgages, prompting them to save more in anticipation of higher interest payments on new home loans, while many U.S. homeowners have locked in record-low interest rates with 15- and 30-year fixed-rate mortgages.
"European consumers are just very cautious, while American consumers are more willing to spend, spend, spend." Nathan Sheets, chief economist at Citibank, believes that "American households can be said to have been in a situation where they feel more comfortable maintaining a relatively low savings rate."
Outside the eurozone, British consumers are also being extremely cautious. Official data released this week showed that the UK household savings rate rose to a three-year high of 10% in the second quarter, which, although revised downward, was still well above the average level of 7.5% in the period 2010-2019.
Capital Economics economist Simon MacAdam believes that the growth in European household wealth during the pandemic later evaporated.
He explained that European households are investing more in housing than before the pandemic, which has also pushed up overall savings figures in the eurozone.
At the same time, geopolitical security factors may be one of the reasons for Europe's cautious sentiment, as Europe is more dependent on energy supplies from the Middle East than the United States. In addition, weak economic growth has also hit people's morale. For example, Germany, the "economic locomotive" of the European Union, has recently had poor economic data.
On October 7, the latest data released by the German Federal Statistical Office showed that the decline in Germany's industrial orders in August was much larger than expected, further indicating that the manufacturing industry in Europe's largest economy will not recover in the coming months.
Specifically, in August, German manufacturing orders fell 5.8% month-on-month after seasonal adjustment, while the market expected a 2.0% decline. Various indicators point to weak demand in the coming months.
The German manufacturing PMI data released last week showed that Germany's manufacturing industry shrank at the fastest rate in a year in September due to a sharp drop in output, new orders and employment.
“Europeans are saving more because they still feel insecure about the future, the conflict is imminent and Germany is at a low point,” said Samy Chaar, chief economist at Lombard Odier Bank. “A lot has changed for them, and not for the good.”
Lillian, a veteran who has been running businesses in Hamburg, Germany for many years, told the First Financial reporter that the European economy is currently in recession and German consumption is sluggish, and the good days before the epidemic are gone.
Lillian said that a department store in Hamburg that was once prosperous has been demolished. When the German economy was good, the building was packed with customers who came to buy branded bags. But according to her understanding, a friend who was an agent for first-line branded bags in the building has now declared bankruptcy.
According to the OECD, the unified household savings rate in Germany and the eurozone, excluding capital investment, will remain above the pre-pandemic average and higher than that in the U.S. until at least next year. The U.K. will face a similar situation.
The economic outlook between Europe and the United States
In simple terms, the United States usually uses four main components to calculate its gross domestic product (GDP): personal consumption expenditures, business investment, government spending and net exports. Among them, personal consumption expenditures usually account for nearly 70% of GDP, and the retail and service industries are important components of the US economy.
Mazandi said that the lower U.S. savings rate will help boost consumer spending, which has been the main driver of U.S. economic growth and an important reason why the U.S. economy has grown faster than the European economy. "American consumers have been driving the global economic train forward."
According to the latest OECD forecast, driven by strong household spending, the US GDP is expected to grow by 2.6% this year, while the eurozone and the UK will only grow by 0.7% and 1.1% respectively.
On the 4th, the U.S. Department of Labor released data showing that the number of new jobs in the U.S. non-agricultural sector in September was 254,000, higher than market expectations. At the same time, the unemployment rate fell by 0.1 percentage point month-on-month to 4.1%, and the data has fallen for two consecutive months. The better-than-expected employment data in September shows that the labor market is still strong and the U.S. economy is still resilient.
Data from the U.S. Department of Commerce showed that U.S. retail sales grew 0.1% month-on-month in August, lower than the 1.1% growth rate in July. The growth rate in July was the highest since January 2023. Xinhua News Agency quoted U.S. media analysis as saying that the continued growth of retail sales in August compared with July showed that U.S. consumers were still willing to consume under the current high interest rates, which was "good news" for the U.S. economy. Experts predict that given the recent decline in unemployment and growth in retail sales, the Federal Reserve may cut interest rates by 25 basis points in September instead of 50 basis points. At the same time, the Federal Reserve may continue to cut interest rates in November and December.
Innes McFee, chief global economist at Oxford Economics, said that after a turbulent period following the epidemic, the global economy has returned to the low growth trend of recent decades.
"We predict that the average global growth rate will be 2.7% this year and next year." McPhee explained to the reporter from China Business Network that our interpretation of the data is that the downside risks facing the US economic expansion have been exaggerated, and its economy has entered a growth rate that is more consistent with the trend.
He also said: "Our indicators show that Europe's economic growth momentum is moderate and the growth rate is in line with the trend. The outlook for other regions is very different." For example, economies such as South Africa and Brazil are in an upswing. On the contrary, economies such as Sweden and South Korea are still mired in a slump.
